Play the Ethanol Potential Through Chemicals

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 |  Includes: AMRS, DD, DOW, WM
by: Dana Blankenhorn

Global warming deniers are cheering news that subsidies for crop-based ethanol will expire at the end of the year, under the debt ceiling deal approved today.

They are upset that one form of subsidy – for cellulosic alcohol – will continue. And it is true there is no pure play in the area. The companies winning loan guarantees to create commercial cellulosic ethanol plants, like POET and ZeaChem, are all privately held.

But there is a place to play for profit in this market - chemicals.

Take Amyris (NASDAQ:AMRS), which went public last October. It provides the biological feedstock that can make cellulosic ethanol happen.

The most important point about this play is that it is less about energy than chemicals. Amyris' best-known product, Biofene, is an ingredient that can be used in the creation of adhesives and packaging, which now require petroleum feedstocks.

Most of the 30 hottest companies in renewable chemicals and materials compiled by Biofuelsdigest are of this ilk. It's not all about ethanol.

The hottest company on that list, Genomatica, is currently in the IPO waiting room. The idea is that instead of competing with alcohol or something like diesel oil, you can use corn, biomass and landfill gas to create chemicals just like those made from oil or natural gas, at a competitive price.

That's why the Biofuelsdigest list is studded with names like Dupont (NYSE:DD), Cargill, Waste Management (NYSE:WM) and Dow Chemical (NYSE:DOW).

You can think of fuel as the bottom of a long stack of products, which could be produced by oil and natural gas, but which could also be produced, competitively, from other things. Getting profits from the top of the stack uses organic feedstocks, and helps drive volume production that will, in time, justify investment in the sector.

But not for fuel. Not yet. That's not the low-hanging fruit. Remember what that guy in The Graduate said, when they tell you cellulosic biofuels are a bust.

Plastics.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.